The Indian stock market's "carnival" came to a temporary halt at the beginning of October. As corporate earnings growth slows down, the benchmark index has recently seen a significant correction, reigniting market concerns about the "peak" of Indian stocks.
As of the 14th, foreign investors have reduced their holdings of Indian stocks by more than $7 billion in October, marking the largest monthly outflow since the record set in March 2020. At least a portion of these funds has been shifted to the Chinese market.
"The disappearance of the allocation gap between the two countries indicates that the improvement of confidence in China has come at the expense of India," said Ritesh Samadhiya, a strategist at Bank of America Securities, in a report.
Signs of a slowdown in India's macroeconomic growth are also evident. Analysts at Jefferies Financial Group Inc. predict that corporate earnings growth in India may slow to the lowest level in more than four years.
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The Indian stock market has corrected, but valuations remain high.
The benchmark index for the Indian stock market fell nearly 3% in October, reducing this year's gains to 15%.
The MSCI India Index fell 2.6% in October, after the index had risen for 11 consecutive months. Even so, the index's valuation is still almost 24 times its 12-month forward earnings, while the five-year average valuation is about 21 times. This is also more than twice the price-to-earnings ratio of the MSCI China Index.
In addition, signs of a slowdown in India's macroeconomic growth are evident. In September, the growth rate of India's goods and services tax revenue was the lowest in more than three years, while passenger car sales fell nearly 19% year-on-year. In August, electricity demand decreased compared to the same period last year, and both the manufacturing and services purchasing managers' indices declined.
The latest earnings season, which began on October 10th, has also been disappointing, with net income from Mukesh Ambani's Reliance Industries Ltd. and Tata Consultancy Services Ltd. failing to meet expectations. These two companies lead India's $250 billion industry, helping enterprise customers adopt automation, cloud computing, and artificial intelligence.Analysis suggests that the slowdown in profitability is driven by weakened consumer spending and rising commodity prices. Rajat Agarwal, an Asian equity strategist at Société Générale in Bangalore, stated:
"The macro momentum has clearly weakened. We clearly see that there is a downside risk to the market consensus, which could put pressure on the market."
$7 billion capital exodus from Indian stock market
As of the 14th, overseas investors have sold off more than $7 billion worth of Indian stocks in October, marking the largest monthly outflow since the record set in March 2020. At least a portion of these funds has been shifted to the Chinese market.
Quantitative strategists at Bernstein downgraded their rating on Indian stocks from neutral to underweight last week, citing the high valuation of Indian stocks relative to China and other emerging markets, which increases their vulnerability.
Analysts Rupal Agarwal and Cheng Zhang wrote in a research report published on October 10:
"We have ended our long-term momentum trade on India, as its valuations are currently at or near historical highs, while the earnings cycle is heading towards a downturn."